A Danger Lurks In The Righteous War Against Patent Trolls

Richard Levick
, ContributorI write about the intersection of business and public affairs.Opinions expressed by Forbes Contributors are their own.

Judging from events that have already occurred, and others that soon will occur, righteous forces are gathered against patent trolls as never before. It is an impassioned pursuit of a coherent legal culture to ensure real innovativeness, and to protect companies from extortion practiced by predatory business ventures.

Earlier this year, new proposals from the White House, including seven legislative recommendations and five executive actions, were hailed as healthy follow-up in the wake of the landmark Leahy-Smith America Invents Act (AIA). There’s always been consensus on the need for action, even among those who distrust big corporations that are the typical victims. Heretofore, though, judicial and legislative reform simply moved slower than the R&D held hostage by the trolls.

Yet as I have written in these pages, the real igniter of reform may well be the fact that hotels or coffee shops with Wi-Fi, or for that matter anyone who owns a computer, can be targeted. They’re the voting stakeholders who have compelled politicians to take action. Troll-related litigation costs to small business now total in the millions. (The aggregate drain caused by the trolls is estimated at $29 billion.)

In any event, the war on trolls has progressed apace since we last visited the topic. In early December, the House of Representatives overwhelmingly passed the Innovation Act, and the Senate will be turning to it within weeks. Among its provisions are significant new limits on discovery, a green light for courts to shift legal costs to the losing side (“losers pay”), and a stay of legal action against defendants’ customers.

Equally encouraging to the reformers, the Supreme Court agreed to rule on what inventions are eligible for patent protection. At issue here are the patents granted in the last decade by the U.S. Patent and Trademark Office (USPTO) for broad business-process and software. Critics argue that those patents are untenably vague and therefore provide frivolously easy causes of action for the trolls.

It’s a purported abuse rooted in the 1998 State Street Bank case in which the Federal Circuit ruled that algorithm-based business methods are patentable. Since then, it’s been a federal court-by-federal court adventure. Most notably, in the 2007 Alice Corporation v. CLS Bank case, a ten-member Federal Circuit panel issued seven disparate opinions. It is this case that SCOTUS will rule on in 2014.

Meanwhile, global and local forces are now arrayed against the trolls. New Zealand overhauled its system to ensure that software cannot be patented. Stateside, Nebraska’s attorney general threatened one troll with legal consequences if it violates local unfair competition law by targeting area companies, while Vermont passed an anti-troll bill to help those unfairly accused of infringement counter-sue their adversaries for bad-faith litigation. Presumably, bad faith is an easier charge to make stick against patent holders who never use the technology they “own,” nor show any likelihood of doing so.

Such anti-troll activism will likely be tested in courts but, in a sense, it doesn’t matter. The forces are gathered at both the grassroots and in the corridors of power – and they won’t demobilize, period. The powers of historical inevitability have taken over. Isn’t that all good?

Well, almost.

The problem is that, in our collective zeal to disincentive extortion, we tend to assume that any small company is a troll if it holds a patent it hasn’t used, and is suing a big company that has. By such a generic and, in the current climate, perhaps inevitable expansion of the term “patent trolls,” universities can fall under the stigma, as can small- or medium-sized companies working to develop new products.

Take VirnetX as an example. Its founders were government think tank members who developed a patent portfolio while working under contract for the CIA. They labored on government salaries for years with few benefits other than the opportunity to take their patents with them when they left.

“Some companies now call VirnetX a patent troll because they don’t see it as having been successful with its product,” says Jason Cassady, a partner at Caldwell Cassady & Curry who represents VirnetX. (Full disclosure: My firm has a business relationship with Caldwell Cassady & Curry. We do not have a business relationship with VirnetX.)

Even VirnetX’s Wiki page has been edited to label it a “non-practicing entity.” So, when VirnetX sued Apple for infringement over network security technology, it seemed a prototypical case of a troll going after a fat mark.This time, however, the case went to trial (which trolls typically avoid like the plague) and the jury awarded the plaintiff $368 million. Cassady believes it is the largest judgment ever in a patent case against Apple. The verdict was upheld this February by a U.S. District Court.

It wasn’t VirnetX’s first sortie against the behemoths. The company had likewise looked like a troll without being one when it sued Microsoft in 2010 for patent infringement, also involving virtual private network technology. Here too, the case went to trial and the jury awarded VirnetX $105 million in a willful infringement verdict. The case then settled.

True, the willingness to go to trial is a strong sign that the plaintiff is not likely a troll. However, the danger is that too many meritorious claims may fall by the wayside as the multi-level crusade against trolls gains steam. “We’re trivializing what a patent troll is and what it’s not,” says Cassady. “Someone who’s trying to build something in the American way – struggling to enter the market and depending on their property rights in order to protect their investment of time and money – they are called a derogatory name and face uphill legal battles in courts of law and the Court of Public Opinion.”

If VirnetX’s good fortune is the exception that proves the rule, we have a cautionary lesson here for lawmakers, tribunals, and the public. What now seems like a war waged on behalf of innovation is being fought with a double-edged sword, as the entrepreneurs who are our most innovative trailblazers may actually wind up casualties once all the dust clears.